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Coffee and Wine: A Comparison of Two Value Chains, Ownership Structures and Sustainability Standards

Morten Scholer Coppet, Switzerland

mortenscholer@hotmail.com Abstract: Purpose: The coffee sector looks up to the wine sector – for several good reasons: Wine has a long and fascinating history, wine is full of prestige and mystery with terms like terroir and bouquet, and the prices of wine are (sometimes) high. So in the coffee sector you regularly hear the question: Why don’t we do as they do in the wine sector? An analysis of the two sectors is ongoing for clarification of the many similarities and differences between the two sectors – partly to respond to the question raised above. Methodology: The two products and the two value chains are analysed for comparison – from tree and vine to cup and glass. Desk research is supplemented with visits to organizations, research institutions, conferences, growers, producers, companies and individuals in both sectors in producing and consuming countries. Findings: More than 60 differences between the two products as well as the two sectors have been identified till now. Four structural differences between the two sectors are highlighted in this paper. Practical implications: The findings will be used for a book with a detailed juxtaposition of the two sectors. The book is scheduled to be published in 2017. Keywords: Coffee, wine, comparison, value chains, dominating companies, sustainability.

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1. BACKGROUND The coffee sector looks up to the wine sector for several reasons. Wine has a long and fascinating history, it is full of prestige and sometimes hype, and some wines are sold at astronomic prices. But the coffee sector cannot directly copy the wine sector as many aspects in the two sectors are fundamentally different. This paper describes four differences between the coffee sector and the wine sector. The data is taken from a larger gross material compiled for several years by the author. The initial aim with the material was to advise the coffee sector on how it can possibly benefit from imitating the wine sector. Indications are currently that both sectors can learn from each other. A book on the topic is scheduled to be published in 2017 and may be the first of its kind. 2. FOUR DIFFERENCES BETWEEN THE COFFEE SECTOR AND THE WINE SECTOR 2.1. Structure of the value chains The most significant difference between the coffee sector and the wine sector is probably the number of stages in the value chain. The value chain is long for coffee – with many physical transformations and shifts of ownership – whereas it is short for wine with only few transformations and usually with all of them at the same location. Wine is one of the very few products still produced from A to Z in the same place. The wine producer usually (i) grows the grapes, or knows the grower and where the grapes come from, (ii) tastes, evaluates and adapts the product during processing, (iii) puts up the final product for sale, and (iv) often also knows at least some of his or her buyers and gets their feedback. The wine producer thereby gets to know the final product (wine) very well. The coffee grower typically (i) sells coffee cherries or green coffee beans to a domestic trader who (ii) supplies an exporter who processes the coffee and then (iii) sells it to a trading house that (iv) supplies roasters who (v) sell the final product (roasted coffee) to retailers where (vi) the end consumer buys it, and eventually (vii) becomes the coffee brewer – unless the coffee is purchased in a café or restaurant. Many coffee growers have never tasted or even seen a cup of coffee.

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Table 1. Key stages in the typical value chain for coffee and for wine

Coffee

Wine

• Field work • Harvest • In-land trading • Primary processing (dry or wet) • In-land trading • Milling • Sorting • Stuffing (bags or bulk) • Sale from exporter • ……………. Border …………… • Shipping • Storage • In-land transportation • Blending • Roasting • Packing • Sale to professionals, retail and

end-consumer • Grinding • Brewing (professional or at home) • Serving – drinking

• Field work • Harvest • De-stemming and crunching • Maceration • Fermentation • Storage (aging) • Blending • Bottling • Sale from producer • ……….… Border …………... • Shipping • Storage • In-land transportation • Sale to professionals, retail and

end-consumer • Serving – drinking

…………………………………………….. The main physical transformations are underscored.

2.2 Quality enhancement options The quality of wine can be enhanced in many ways by chemical and physical methods. Enthusiasts of ‘natural-wine’ tend to call these methods manipulation. Some of the methods are known for centuries – others are developed in the last few decades. Table 2 has a list of some of the most frequently used methods. Table 2. Chemical and physical methods for enhancement of the quality of wine - Flash détente – heating of grapes to 85 °C (185 °F) followed by vacuum exposure for aroma and tannin extraction from the grape skin; - Concentration – reverse osmosis, evaporation and icing (cryogenic); - Industrial yeasts – a huge choice for different functions and styles; - Chaptalization – adding sugar for increase of the alcohol content; - Acidification – adding acids for adjustment of aroma and flavour; - Fining – using additives for clarification of an otherwise hazy wine; - Cone-spinning – a vacuum exposure at 35 °C (95 °F) for adjustment of alcohol and aromas; and - Oak-flavouring – using barrels, staves and chips for adjustment of aromas and flavours.

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Only a few quality improvements of this kind are possible for coffee. Among the few methods are steam-cleaning of green (raw) Robusta beans and preservation of some aromas in the production of soluble (instant) coffee. Otherwise focus is on preserving the intrinsic high quality and avoiding deteriorations at all stages in the value chain. The quality can drop in many ways on coffee’s long journey from tree to cup, for example because of moisture and fungus if the coffee is stored at a wrong temperature or humidity. And once the quality has dropped it is next to impossible to correct the mishap. One remedy is to roast the beans harder as it is sometimes done for coffees (also good quality coffees) taken with milk and other additives (caffè latte, cappuccino, etc.). But dark roasting is not a genuine quality improvement but sometimes done to ‘cover’ a mediocre quality. 2.3 Large companies in the two sectors Ownerships in the world of coffee trading houses, roasters and brands have changed regularly for many years – not least since 2000. The overall trend is towards ‘getting big’ – as in other sectors like banks, airlines, breweries and the pharmaceutical industry. Among coffee trading houses (importers of green beans – also offering processing, storage, just-in-time delivery and financing) the largest groups have more than 10% of the world market. The eight largest groups have 50% of the world market. At the level of roasters (offering branded products to retailers) the two largest groups have over 10% of the world market and the eight largest groups combined have 40%. Most of the leading coffee trading houses and roasters are European as reflected in Table 3. The wine sector is different. The leading companies in the industry may be big but even the largest of them account for less than 3% of the global production of wine. The ten largest companies combined account for 13% only. Only two of them are European – both French. The large wine companies are generally not known by the end-consumer whereas many of their brands are well known – some of them worldwide. Details on the companies and some of their brands are given in Table 4 and Table 5. The wine industry in the US is dominated by a few large companies. Three of them – E&J Gallo, Constellation Brands and The Wine Group – are the world’s biggest wine companies. Combined they account for more than half of all wine traded in the US.

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Table 3. Large companies in the coffee sector

Function World market Portion

Company Nationality

Trading houses

11% 10% 7% 7% 6% 4% 3% 2%

Neumann – NKG ECOM (incl. Armajaro) OLAM EDF Man – Volcafe LouisDreyfus Noble Sucafina COEX

Germany Switzerland Singapore-UK UK-Switzerland France-CH-NL HK-Singapore Switzerland USA

Roasters (brands)

13% 11%

5% 3% 3% 2% 2%

1.5% 1.5% 1.5% 1.5% 1.0% 1.0%

Jacobs Douwe Egberts Nestlé (Nescafé, Nespresso, …) Smucker’s (Folgers, Milhouse, …) Elite-Strauss Tchibo Starbucks Lavazza Keurig Green Mountain Melitta Segafredo-Zanetti Aldi Kraft (Maxwell House, …) UCC

NL-Germany Switzerland USA Israel-USA Germany USA Italy USA Germany Italy Germany USA Japan

Source: ITC/UN’s The Coffee Exporter’s Guide with the author’s updates from company homepages and interviews. Table 4. Large companies in the wine sector

World market portion

Company Nationality

2.7% 2.1% 1.6% 1.0% 1.0% 1.0% 1.0% 1.0% 0.9% 0.7%

Gallo Winery Constellation The Wine Group Treasury Wine Group Penaflor (Trapiche) Concha y Toro Castel Accolade Pernod Ricard Bronco Wine

USA USA USA Australia Argentina Chile France Australia France USA

Source: Author’s calculations based primarily on information from the companies’ homepages. The data is cross checked through articles and interviews.

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Table 5. The world’s ten best selling wine brands

Rank

Brand Owner Wine origin Million bottles 2014

1 Barefoot E&J Gallo Winery, USA California, USA 216 2 Gallo E&J Gallo Winery, USA California, USA 174 3 Concha y Toro Concha y Toro, Chile Chile 170 4 Robert

Mondavi Constellation Brands, USA California, USA 145

5 Sutter Home Trinchero Family Estates, USA

California, USA 130

6 Yellow Tail Casella Wines, Australia Australia 126 7 Hardys Accolades Wine, Australia Australia 113 8 Lindeman’s Treasury Wine Estates,

Australia California, USA 97

9 Beringer Treasury Wine Estates, Australia

California, USA 86

10 Jacob’s Creek Pernod Ricard, France Australia 72 Source: The Drinks Business, May 2015 (with permission). The world production is 270 million hectolitres annually; Barefoot makes up close to 0.6% of the world production and 5% of the market in the US (30 million hectolitres or 4 billion bottles). China’s largest brands include Great Wall (in the French group Pernod Ricard), Dynasty and Changyu. They are not ranked here as data is insufficient. 2.4 Sustainability standards Sustainability standards have become à-la-mode in both coffee and wine in the last two decades for various reasons: good for the environment (soil, water, climate, CO2 emission, flora and fauna), good for the workers (health, remuneration and work conditions in general), good for the consumer (health – and taste, maybe), good for transparency and traceability, and generally good for the image of all parties involved, including the end-consumer. Sustainability standards are more complex for coffee than for wine for several reasons. That goes for development of the standards, implementation (training and introduction of new practices), certification and monitoring of compliance. Note: ‘More complex for coffee than for wine’ is not the same as ‘easy for wine’! Here are four reasons why sustainability standards are more complex for coffee than for wine: 2.4.1 Coffee standards are global The leading sustainability standards for coffee operate worldwide and the conditions for all partners in a standard are the same – apart from minor deviations under very special circumstances. The most prominent standards (also called schemes or programmes) are Organic, Fairtrade, Rainforest Alliance, UTZ Certified and 4C, which cover one or three

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sustainability dimensions as shown in Table 6 below. Most of the leading standards are practiced in more than half of the over 60 coffee producing countries. Table 6. Leading sustainability standards for coffee

Dimension

Standards with a ‘main dimension’

Standards covering

‘all dimensions’

Environmental

Organic

Biodynamic Shade-grown Bird-friendly

- Rainforest Alliance - UTZ Certified - 4C (Common Code for the Coffee Community) - Nespresso AAA - Starbucks‘ C.A.F.E. Practices - Keurig Green Mountain’s Responsible Sourcing

Social

Fairtrade (FLO) Fair Trade USA

Economic

-

Four notes on Table 6:

x The overview of sustainability standards for coffee is somewhat simplistic but for comparison at a glance it can be useful.

x The sale of coffee under each of the leading sustainability schemes (Organic, Fairtrade, RA, UTZ, 4C, Nespresso-AAA, Starbucks-C.A.F.E. and KGM-RS) is around 1-2% of the world’s coffee. Some coffees are double-certified, for example Organic and Fairtrade. The total sale of coffee under the mentioned schemes is in the magnitude of 10% of the world’s coffee.

x 4C is an entry-level business-to-business standard with no logo on the retail packs. x The in-house schemes set up by the leading brands (Nespresso, Starbucks and KGM)

are certified by third parties. They are comparable with RA and UTZ, and also include criteria for the cup quality of the coffee.

Sustainability standards in wine are different. They are developed for one country or one region only – and are usually developed by people in that country and adapted to conditions in that country or region. The standards for wine have primarily covered environmental issues, including carbon emissions. Social and economic criteria have been somewhat ignored although that is changing. Nationwide programmes for wine are set up in, for example, Austria, South Africa, Australia and New Zealand. Among the many regional programmes are California, which again has sub-regional programmes, for example in the county of Sonoma.

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2.4.2. A long value chain with many participants The value chain in coffee is longer and more complex than in wine. As all parties have to be part in and comply with the standard it means (i) many producers involved (sometimes thousands of smallholders), (ii) many stages of physical transformations to be adapted for compliance and later on monitored, (iii) many partners who do not know each other (each of them individually handling the coffee in the long value chain), and (iv) partners in the chain are far from each other – sometimes 10,000 km or more. 2.4.3. Geographical spread There are more than 60 coffee producing countries. Most coffee ends up in blends based on two or five or more coffees from around the world. Each of these coffees has to comply with the sustainability standard used which adds to the logistic complexity. Wine may also be a blend but the grapes usually come from the same estate or at least the same region. This component of the complexity has made Rainforest Alliance sometimes indicate that (as an example) ‘40% or more of this coffee is RA certified’, which may refer to one out of three coffees in a blend. 2.4.4. Participants’ education Around 80% of the world’s coffee is produced by smallholder growers in Honduras, Rwanda, Indonesia and more than 50 other developing countries. Participants in sustainability programmes in coffee producing countries are usually not as well educated and informed as the grape growers, the wine producers and other parties in the wine business. 3. SUMMARY More than 60 differences between coffee and wine (as products and as sectors) have been identified and described till now. Four of the most significant differences are listed in Table 7. Table 7. Four significant differences between the coffee sector and the wine sector

Basis for comparison Difference Number of stages in the value chain (physical transformations and shifts of ownership)

Coffee: Many stages in different places; Wine: Fewer stages – usually in one place

Options for quality enhancement during transformation and processing

Coffee: Very few options only; Wine: Many options – both chemical and physical

Leading companies’ share of the world market

Coffee: Some companies have over 10%; Wine: All companies have below 3% (but may still be very large)

Complexity of sustainability standards

Coffee: Fairly complex – and global; Wine: Easier than coffee – which is not the same as easy!

A book describing and comparing the two products and two sectors in detail is scheduled for publication in 2017. It may be the first book of its kind.

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ANNEXURE:

COFFEE AND WINE - KEY DATA ON PRODUCTION, TRADE AND CONSUMPTION

Coffee production and trade - The world production of coffee is 150 million 60-kg bags (9 million tonnes) of green coffee beans per year. It takes almost 500,000 containers (20 ft.) to carry that much coffee. Placed in a row they would stretch over 3,000 km (1,800 miles). - Coffee is produced in more than 60 countries of which two account for more than half of the world’s production: Brazil 36% and Vietnam 16%. - African countries combined produce around 12% (only). - Arabica coffee, the fine-flavoured aromatic type, makes up around 60% of the total production and usually fetches the highest prices. The other variety, Robusta, is easier to produce and is more resistant to disease. It is often used as a filler in blends. - Around 70% of all coffee is exported – most of it in the form of green beans.

Coffee consumption - The Nordic countries consume almost 10 kg coffee (green bean equivalent) per capita annually. Most other European countries consume around 6 kg with UK and some Eastern European countries at around 3 kg only. - The consumption is very low in most coffee producing countries apart from Brazil where it is 6 kg. That is higher than in the United States where it is 5 kg per capita. - Tea-drinking China and India consume on average only around 100 grams per capita. - Leading brands like Starbucks, Nespresso and Keurig Green Mountain each account for around 2% of the world’s coffee by volume.

Wine production and trade - The world production of wine has been stable at around 270 million hL annually since 2000. - Three countries (France, Italy and Spain) produce half of the world’s wine. - Just over 40% of the world’s wine is traded internationally (exported/imported). - Around 50% of the wine exported from the Southern Hemisphere (mainly Chile, Argentina, South Africa, Australia and New Zealand) is sent in bulk containers and bottled or otherwise packed for retail when it reaches Europe, North America or other destinations.

Wine consumption - Europe consumes around 60% of the world’s wine. In 2000 it was 70%. - Consumption per capita in France, Italy and Portugal is around 40 litres per year. It was above 100 litres in 1960. - Consumption per capita in the UK, Germany, The Netherlands and the Nordic countries is 20-30 litres per year– up from around 3 litres only in 1960 (12 litres for Germany). - Consumption per capita in the US is on average 12 litres per year – up from 3 litres in 1960.